The Bank of England has opted to maintain interest rates at 3.75% in a closely contested decision, while strongly hinting that further cuts are on the horizon for later this year. The central bank's latest projections indicate that inflation is set to fall back to its 2% target by the spring, a more rapid decline than previously anticipated.
A Narrow Decision with Significant Implications
In a tight vote that underscores the delicate balancing act facing policymakers, five members of the nine-strong Monetary Policy Committee (MPC) voted to keep rates unchanged. Governor Andrew Bailey cast the decisive vote in favour of holding, while four members advocated for an immediate 0.25 percentage point reduction to 3.5%. The closeness of this decision, coupled with a shift in the Bank's official language, suggests that the first cut could materialise as early as the next MPC meetings scheduled for mid-March or early April.
Inflation Forecasts Revised Downwards
The Bank's updated economic outlook paints a picture of more swiftly receding inflationary pressures. It now predicts that the Consumer Prices Index will drop to around 2% in the second quarter of the year, a significant downward revision from the 3.4% recorded in December. This accelerated decline is attributed in part to government measures, including cuts to energy bills announced in the budget, which are expected to shave approximately 0.5 percentage points off inflation. A moderation in food price rises is also contributing to this improved outlook.
Governor Andrew Bailey stated, "We now think that inflation will fall back to around 2% by the spring. That's good news. We need to make sure that inflation stays there, so we've held rates unchanged at 3.75% today. All going well, there should be scope for some further reduction in the Bank rate this year."
Economic Growth and Employment Concerns
Alongside the brighter inflation picture, the Bank has also downgraded its forecast for GDP growth this year from 1.1% to a modest 0.9%. It anticipates a rise in unemployment to 5.3%. This combination of weaker growth and a softening labour market is seen by many analysts as creating the necessary conditions for monetary policy to become more accommodative in the coming months.
The Policymakers' Delicate Balancing Act
Despite these factors, a majority of the MPC chose to hold firm for now. Their decision reflects an ongoing effort to weigh the risk of persistent underlying inflation, driven in part by rising wages, against the opposing danger that increasing unemployment and subdued consumer spending could pull inflation below the 2% target. The committee noted in its minutes that "the risk from greater inflation persistence has continued to become less pronounced, while some risks to inflation from weaker demand and a loosening market remain."
Scepticism Over Government Measures
The timing of any future rate cuts will hinge critically on the Bank's assessment of how sustainable the 2% inflation rate proves to be over the medium term. Some MPC members expressed scepticism that the short-term fiscal measures announced by Chancellor Rachel Reeves—including changes to energy bill calculations, a freeze on rail fares, and a fuel duty freeze—will fully offset underlying upward pressures on prices in the long run.
The governor's own voting pattern shifted since the last meeting in December. On this occasion, Mr Bailey sided with members Megan Greene, Clare Lombardelli, Catherine Mann, and Huw Pill in favouring no change. In December, he had voted with the more dovish faction—Sarah Breeden, Swati Dinghra, deputy governor Dave Ramsden, and Alan Taylor—who were in favour of a cut. This change underscores the evolving and nuanced debate within the committee as new economic data emerges.
